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Steps to inflation-proof your finances

5 ways to help inflation-proof your finances

To make the most of your savings and investments, you need to understand the impact of inflation. 
 
Then you can start taking some steps to inflation-proof your finances.  
 
First, it can be helpful to take a step back for a reminder of what inflation actually is, and what impact it can have on your finances.  
 
What is inflation? 
Inflation is the gradual increase in prices over time. Or, looked at a different way, it’s the process by which your money loses value over time. 
 
It can help to consider a simple example: if something costs £100 and the inflation rate is 5%, then it would cost £105 in a year’s time. Or, instead of spending it, you could save or invest that £100. If you put it in a bank account which returned 1% per year, then your £100 would become £101, but the real return would still be -4% with the impact of inflation. In other words, your money would have lost some of its value.  
 
Over time, inflation can really take its toll; £10,000 invested in the average bank account over the past 10 years has seen its real buying power reduced by more than 12%*.  
 
How high is inflation now? 
Inflation jumped to 9% in April, up from 7% in March, which is its highest level in over 30 years and well above the Bank of England target of 2%. The Bank of England expect inflation to rise further to around 10% this year; putting pressure on households and savers. In fact, in a survey commissioned by NFU Mutual in 2021, 86% of respondents said there worried about the inflation rising in 2022. 
 
Protect your finances from inflation 
There are some steps you can take to help reduce the impact of high prices and protect the value of your finances. 

1. Try alternatives to cash savings

 Keeping your money in a savings account may seem the most sensible and safest thing to do.  
 
That can certainly be true in the short-term, but if you’re planning for the long-term, for five years or more, then it might be better to invest some of your cash, as the stock market has the potential to give better returns than cash over long time periods.   
 
If you aren’t sure whether investing is right for you, or how to get started, then talk to an NFU Mutual Financial Adviser.  

2. Diversify 

If you invest, then you can reduce the risk of losing money by spreading it between different kinds of investments, known as ‘asset classes’. These typically include shares, government and corporate (company) bonds, property, as well as cash. 
 
A diversified portfolio doesn’t guarantee you’ll be protected from losses. But it can help lower your risk, as the values of different types of assets don’t always move in the same direction.  
 
In a diversified portfolio, a fall in the price of one investment has less of an impact overall. 

3. Reconsider your financial goals 

When inflation is high, it becomes particularly important to reassess your financial plan, to ensure it will still give you the outcome that you wanted. 
 
Again, you may want to speak to a professional financial adviser to help ensure you have the best possible plan in place for the circumstances. 
 
The sooner you start getting expert advice about your financial goals, the sooner you’re likely to reach them.  
 

4. Re-think your day to day finances

Inflation doesn’t just impact your savings and investments; it can also mean that goods and services you pay for in your daily life are getting more expensive. This can range from food and fuel, to energy bills.  
 
So, as part of your planning, be sure to factor in the impact of higher prices on your finances.   
 
Inflation is a fact of life, and a challenge for savers and investors - but by planning carefully, you can do your best to minimise its impact.  
 

5. Don't miss out on tax breaks: ISAs and Pensions

You can improve the returns on your investment by not paying more tax than you need to. 

  • ISAs - You can invest up to £20,000 in an ISA each tax year free for UK Income tax and Capital gains tax.
  • Pensions – For every £80 you invest HMRC will add another £20. If you pay higher rate tax you can claim back up to an additional £20. 

*Data from FE fundinfo 2022 - 31/12/2011 - 31/12/2021

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